Eighth Circuit Expands Subsequent New Value Preference Defense In Cases Involving Three-Party Relationships

A bankruptcy trustee or chapter 11 debtor-in-possession has the power under section 547 of the Bankruptcy Code to avoid a transfer made immediately prior to bankruptcy if the transfer unfairly prefers one or more creditors over the rest of the creditor body. However, not every payment made by a debtor on the eve of bankruptcy can be avoided merely because it appears to be preferential. Indeed, section 547 provides several statutory defenses to preference liability. The Eighth Circuit Court of Appeals recently addressed one such defense to preference avoidance—the "subsequent new value" exception. In Stoebner v. San Diego Gas & Electric Co. (In re LGI Energy Solutions, Inc.), 2014 BL 76796 (8th Cir. Mar. 20, 2014), the court, in a matter of first impression, ruled that "new value" (either contemporaneous or subsequent) for purposes of section 547(c) can be provided by an entity other than the transferee.

Avoidance of Preferential Transfers

A fundamental goal underlying U.S. bankruptcy law is equality of distribution among similarly situated creditors. To that end, the automatic stay generally prevents creditors from acting to collect on their debts after a debtor files for bankruptcy. In addition, section 547(b) of the Bankruptcy Code provides for avoidance of transfers made by an insolvent debtor within 90 days of a bankruptcy petition filing (or up to one year, if the transferee is an insider) to or for the benefit of a creditor on account of an antecedent debt where the creditor, by reason of the transfer, receives more than it would have received if, assuming the transfer had not been made, the debtor were liquidated in chapter 7.

Section 547(c) contains nine exceptions to avoidance of a preference. Of these, the three defenses most commonly invoked by commercial creditors are the "contemporaneous exchange" defense (section 547(c)(1)), the "ordinary course payment" defense (section 547(c)(2)), and the "subsequent new value" defense (section 547(c)(4)).

Section 547(c)(4) provides as follows with respect to the subsequent new value defense:

The trustee may not avoid under this section a transfer . . . (4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—

not secured by an otherwise unavoidable security interest; and on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor[.] Thus, even where a creditor has received a preferential transfer, the transferee may offset against the preference claim any subsequent unsecured credit that was extended to the debtor. The purpose of the exception is to encourage creditors to continue working with troubled businesses. See Jones Truck Lines, Inc. v. Full Serv. Leasing Corp., 83 F.3d 253, 257 n.3 (8th Cir. 1996). "It recognizes that the 'new value' effectively repays the earlier preference, and offsets the harm to the debtor's other creditors. . . . Accordingly, 'the relevant inquiry under section 547(c) (4) is whether the new value replenishes the estate.' " Savage & Assoc., P.C. v. Level (3) Communications (In re Teligent, Inc.), 315 B.R. 308, 315 (Bankr...